Revolt Starting in UK Over Private Equity Secrecy

Mirabile dictu, is a revolution against private equity secrecy starting on the other side of the pond, meaning in of all places, finance-dominated England?

We’ve been writing off and on for two years about some of the many less-than-savory practices in private equity, including charging fees that investors had no idea existed; cleverly giving investors the impression that the fund managers are bearing costs that are actually eaten by the fund; widespread, dubious metrics for calculating returns; questionable accounting practices at the portfolio company level. Private equity looks like a high end version of the mortgage servicing industry, where the agents are lining their pockets at the expense of their principals in a big and often not kosher way. As the SEC’s Drew Bowden put it:

[A] private equity adviser is faced with temptations and conflicts with which most other advisers do not contend. For example, the private equity adviser can instruct a portfolio company it controls to hire the adviser, or an affiliate, or a preferred third party, to provide certain services and to set the terms of the engagement, including the price to be paid for the services … or to instruct the company to pay certain of the adviser’s bills or to reimburse the adviser for certain expenses incurred in managing its investment in the company … or to instruct the company to add to its payroll all of the adviser’s employees who manage the investment.

In the US, despite the SEC having issued an uncharacteristically blunt warning about the range and severity of the problems it is seeing in private equity, investors are not making remotely adequate responses. These private equity limited partners, after a flurry of alarm, upset phone calls, and in some cases, issuance of formal questions to fund managers, appear to be siding with the private equity firms. Yes, the general partners look to be making some strategic concessions so everyone can save face, witness private equity kingpin Blackstone’s announcement that it is ditching termination fees. But that falls well short of the level of behavior change needed.

Why are US investors so craven? The single biggest investor group is public pension funds, providing 20-25% of total industry funds under management. Private pension funds contribute roughly 10%. Fund of funds, which consist of about 15% of industry assets, have a mix of smaller institutions (small public and private pension funds, endowments, foundations, as well as wealthy individuals). Fund of funds’ raison d’etre is investing in the private equity industry, so they aren’t going to rock any boats. But the public and private pension funds collectively have clout, and individually, large and/or marquee investors like CalPERS and Harvard do as well. So why are they apparently sitting pat?

As bizarre as it may seem, the limited partners, are afraid of private equity firms, both institutionally and personally. Institutionally, the limited partners think they need to be in these strategies and won’t be allowed if they take a tougher line with the funds. Individually, I’ve been told by people involved at more than one public pension fund that the staff are afraid that the general partners can get them fired and have enough connections to get them blackballed in terms of future employment in the financial services industry. No one can give an example of this having actually occurred, mind you, but the fear seems to be pervasive.

By contrast, investors in the UK appear to be less intellectually and practically captured, as the row over secrecy indicates. From the Financial Times (hat tip CT):

Anger has erupted over the practice of asset managers coercing pension funds into signing non-disclosure agreements. Pension schemes argue it is uncompetitive and prevents them from securing the best deals for their members.

The imposition of confidentiality agreements means pension funds are not able to compare how much they are being charged by fund managers, potentially exposing them and their scheme members to unnecessarily high fees.

The practice is of particular concern with respect to public sector pension plans, which are effectively funded by the taxpayer.

David Blake, director of the Pensions Institute at Cass Business School in London, said: “Local authorities are not allowed to compare fee deals, and that is an outrage. It should be made illegal that fund managers demand an investment mandate is confidential.”

Yves here. Before we get any further, I can tell you hell will freeze over before you see a comparable story run in the US. Just look at the first sentence, which correctly depicts investors as being coerced into signing confidentiality agreements that are clearly overreaching and unjustifiable, as we and other writers, including Gretchen Morgenson and David Sirota, have explained. You’d never see that characterization in a mainstream US publication.

Admittedly, the article focuses on only one of the bad results of the lack of transparency, namely, the inability to shop fees. There are plenty of others, including hiding that the general partners have contracted out of having a fiduciary duty, weak oversight, appallingly low disclosure of ongoing expenses, lack of audit rights, particularly regarding the investee companies, and lack of independent valuations.

Another striking element is that someone affiliated with a major business school would dare attack the private equity industry. In the US, PE firms and the big partners as individuals are such significant donors to business schools that nary a bad word dares be said. Moreover, business school professors make more consulting that they do from their putative day jobs, which means that there are large disincentives to alienting potential meal tickets. By contrast, the private equity beachhead is less well established in the UK, so some experts there are willing to cross swords with the industry.

A third difference in coverage with the US is you see no effort at the ridiculous defense made here, that the agreements contain trade secrets and thus there are legitimate reasons for confidentiality. The best defense the industry “mouthpiece” (note the pink paper’s use of a derogatory term!), Daniel Godfrey, chief executive of the Investment Management Association, can offer is that companies have the right to try to keep things secret. But he lost what little credibility he had before that in questioning whether secrecy requirements were “common practice” in private equity. Let me clue you in: they are pervasive. If you don’t agree, you don’t get to participate.

Godfrey cutely suggests that if investors don’t like what the private equity firms they don’t have to invest. That conveniently ignores the fact that correctly or not, private equity funds are treated by many investors as an asset class, which mandates the investors have to take part.

But the investors in the UK are proving to be smarter and more protective of their beneficiaries than their US counterparts. Again from the Financial Times article:

Critics believe the non-disclosure agreements allow fund managers to overcharge some of their pension fund clients significantly. Research published in the FT last year, for example, showed the Staffordshire public pension fund paid £7.2m in fund management fees in 2011/12, while Devon’s public pension fund spent just £2.7m for almost identical investment contracts.

The UK’s National Association of Pension Funds, which represents more than 1,300 schemes with over £900bn of assets, has raised the issue with the Financial Conduct Authority, the regulator.

Paul Lee, head of investment affairs at the NAPF, said: “The growing prevalence of non-disclosure agreements [makes it] hard for pension schemes to know if they are getting a good deal or not. [They are] unhelpful to the proper functioning of a competitive market.”

Yves again. So we see a major industry body taking on private equity secrecy frontally, by going to the authorities. By contrast, all you see from the milquetoast ILPA (the Institutional Limited Partners Association) are face-saving statements of things they’d like to see happen that never go anywhere.

Mind you, this attempt by the National Association of Pension Funds to end private equity secrecy may not succeed. But the fact that they are willing to engage in this important fight shows how cowardly their US counterparts are.

Print Friendly, PDF & Email


  1. vlade

    UK does it share of problems, but all you have to do is to look at the regulators.
    The Libor scandal was pursued by FSA first, as was the FX fixing (although the FX fixing is a more complex subject, since the practice used to be encouraged by regulators/CBs initially.. ). King, the former head of BoE held a number of strong opinions on the banking sector. So are other people in the Bank, Haldane being most visible.
    Turner is a strange beast too…
    I do have the feel that there’s still some noblesse oblige feeling in the UK. Of course not widespread, but in existence compared to the rest of the world.

    What then really gets me is that lots of people throw them all in the same basket. Little wonder that some of them then decide do just give up and go with the majority. Why should you try if you get slagged anyways?

  2. proximity1

    RE: “is a revolution against private equity secrecy starting on the other side of the pond, meaning in of all places, finance-dominated England?”

    To set an example (*), I’ll go out on a limb and say that I doubt that there shall be anything really significant and lasting done.

    That doesn’t preclude some Kabuki dancing to give the impression that something serious is being done, just that, when all the dancers have exited the stage, things will go on largely as they had been. These ridiculous “stress tests” are my favorite example of a professional financial elite who demonstrate how thoroughly they live in what should constitute clinical self-denial, acute self-delusion which separtes them from what others think of as reality. As long as banks’ executives recognize that they remain capable of foisting their irresponsiblely-founded losses off on some poor dumb chump(s) rather than bearing them themselves (banks’ shareholders) , then such stress-tests are proof of nothing other than that these people still enjoy life in a fool’s paradise.

    (*) I think it would be both interesting and salutary if more contributors (and the commentariat, too) take positions/ make predictions about what, based on their reasoned views, they expect to occur as a consequenec of their stated beliefs. That would allow us a check on ourselves and others and add what I think is a very interesting and useful element to the mix. It’s very easy to pronounce on contemporary events when one never presents any clear indications of what he thinks his views should expect us to see happen in the near, mid or longer term. This is particularly interesting wherever we’re entertaining something that is premised on a conspiratorial view of affairs. Of course, there are conspiracies at work–in fact, there must be many of them going on all the time. The thing is, if one is defending one, that should entail some belief, some expectation, which ought to be stated as in, e.g., “If I’m correct in this, then we should expect to see … (X, Y, Z) as example consequences allowing others to check and test these predictions for their accuracy.

    Now, to apply this to the present case, my views of Britain ever getting anything right in the realm of responsible finance being very pessimistic, I consider it extremely unlikely that this hoped-for change in practices shall really prove out. It might, but, to take a stand and predict, my presuppositions suggest that we should expect that there won’t be anything serious to write home about in this matter. It’s not that there aren’t some Very Serious People concerned about the matter, there are. It’s just that there aren’t enough of them and those who find the present system made for them and their profitable interests are still too many and too influential. Example (though not in finance per se). A recent scandal concerning historical cases of sexual abuse by notable people (in society and politics) has forced enough public attention of the issue to require the establishment of a public commission of enquiry [ See: ]. The first person put up to lead it was Ann Elizabeth Oldfield Butler-Sloss, Baroness Butler-Sloss,–quite predicably–so closely associated with so many of the very people who’d likely come under scrutiny for whatever reason (with a very particular instance prominently in the public’s minds (i.e. Leon Brittan; Wikipedia: “Lord Brittan was home secretary in 1984 when ministers were handed a dossier on alleged high-profile paedophiles which has since disappeared; Brittan has insisted that the proper procedures were followed.”) that Baroness Butler-Sloss, after first declaring that she’d stick it out, had to resign her assignment. The next proposed candidate, though holding what many regard as impeccable credentials, is, again, completely predictably, highly safe as far as the interests and worries of the high and mighty are concerned [Catherine Fiona Woolf, lawyer and former president of the Law Society of England and Wales, and the current Lord Mayor of London. The point and upshot being that, in Britain, affairs are so thoroughly under the lock and control of a narrow elite’s interests that finding and securing such an independent director is nigh on impossible to conceive of let alone to accomplish. Such is why I am so doubtful about the prospects for real and meaningful reform in Britain–whatever the disgusting matter of scandal may concern.

    1. vlade

      I disagree with you. That’s not to say I’m optimistic and expect that tomorrow UK will be a better place (if nothing, the current Treasury is a problem, but that’s a different take..)
      There are two fundamental reasons why I disagree with you, one is problem specific, the other is a more generic one.

      The specific reason is that the people complaining aren’t Joe Bull punter on the street, but powerful fund managers. The fund management industry in the UK is much more powerful than the PE/VCs (unlike in the US), and if they are unhappy with the industry, they will push through.

      The generic reason is that while you’re right and we get a lots of enquiries but rarely anything immediately after that (but there were LIBOR prosecutions. And bank CEOs like Diamond were forced out. Small things, but important), I believe that the UK has a history of a change as long as the problem is kept in the public view at least a bit – even if it takes decades sometimes. That’s where I believe it’s important to support Haldanes and Kings of this world, so that the issue doesn’t disappear and important figures are seen as unhappy with the status quo. From that perspective, Carney’s appointment was a bad news, as he’s I believe fully captured. Not that I was suprised by Treasury appointing someone who blows their trumpet..

      1. proximity1

        So, then, I gather that unlike my view, you do expect actual practical consequences–such as, for example, the called-for change in the law which would make such confidentiality agreements illegal? [ Viz: “David Blake, director of the Pensions Institute at Cass Business School in London, said: “Local authorities are not allowed to compare fee deals, and that is an outrage. It should be made illegal that fund managers demand an investment mandate is confidential.” ]

        If that happens, it would be an example of what I meant above about taking a position and making some verifiable or refutable projections based upon it –that is, it would present the opportunity for, in your case, a useful confimation, and, in my case, a useful rejection/refutation–of one’s arguments and view of things. That’s the sort of thing which it seems to me could help us arrive at better understandings of what is going on.

        As to your specific reasons for disagreeing with my view of things: I’d note in reply that it is a curious thing that there should be this supposed apparent diffference in deference on the part of U.S. versus U.K. investors toward their PE fund managers–i.e. the people demanding the confidentiality agreements from the pension fund managers. [ Viz: “… the UK are proving to be smarter and more protective of their beneficiaries than their US counterparts…” ] On the surface, there’s no obvious reason why there ought to be such a difference over deference. Logically, the pension funds’ directors–as Yves’ comments indicate–should wield just as much clout in the U.S. and they supposedly do in the U.K. So, why the differences? We have no clear answers to that. Just a peculiarity.

        As concerns your generic reasons for differing– My skepticism concerns whether the U.K. attitude (open and critical) shall actually lead to something concrete in results. The answer to that is yet to be seen. I’m not convinced that the supporting examples you’ve cited– the infamous LIBOR scandal and its consequences in reform and some prosecutions–are quite as indicative of serious and lasting change as, for you, they would seem to be. That’s because, from what I read, Martin Wheatly’s (its first chairman and chief executive of the newly-created Financial Conduct Authority ) record when it coms to rigorous enforcement of reforms is somewhat varied– sometimes impressive and other times not so impressive. That a new supervisory authority was created is one of the most classic responses in such cases. In another classic twist, the Financial Conduct Authority has subcontracted the actual work of supervision to NYSE Euronext, an entity or, rather, an ever-evolving collection of associated entities that rival Ovid’s epic poem for convolutions. That means that the people responsible are found partly in the FCA and partly in NYSE Euronext–which, if one is interested in finding ways to circumvent rigorous application of undesired supervision is the sort of institutional thing that one should welcome.

        For me, Britain’s record in making timely effective reforms is dismal–very much like that of most other countries, I think. For me, to say that the U.K.’s record for reform is not so bad, despite its sometimes taking decades to bear fruit leaves me rather unimpressed. Punishing (when that actually happens) a few of the lowest-ranking among a number of offenders in some scanalous affair while everyone in high places is left with little other than bruised reputations and perhaps a change in employment (when that actually happens at all) is also not very impressive. What does impress me greatly is the way that, in Britain, France, and other places, the rich and powerful protect those who, having done more or less loyaly their dirty work for them, are defended and protected before, during and after they’ve suffered the gauntlet of press glare and legal prosecution. Rarely are the people who most deserve it held to account for their actions and their roles. But I’d be pleased to see things go differently and, in this case, the revolt really making a lasting and significant difference.

        1. Yves Smith Post author

          Did you read the post carefully? I said that in the US, the LPs are afraid of the industry institutionally and individually.

          A pretty much entirely foreign industry would be unlikely to be seen as able to get staffers fired or hurt their future employment prospects. If the investors don’t think they have to be in PE, as in the threat to be excluded from their funds isn’t seen as a horrible outcome to be avoided at all costs, as it is in the US, then vlade’s point of view is credible.

          1. proximity1

            Well, I thought I’d tried to. I intended to and tried to consider each of the cases in its own realm–the U.S. funds investor–PE relations in their circumstances as you present them and those in the U.K., where, as the FT article indicates (which I read only as far as you cited it) there is open objection to the imposition of the confidentiality agreements on terms. As I read your points there are two interesting main facts– one is the mere appearance of the critical article in the press which you find inconceivable that side of the Atlantic ocean. The other is the different attitudes taken by US and UK fund investors toward PE lenders, where, in the U.K., unlike the U.S., the investors feel no such similar tendency to fear the intimidations from PE lenders. All of that I take as given. Though I see no good reason for–whether it be on one side of the ocean or the other–(pension fund clients) funds investors (i.e. in the U.S.) to take such a deferential attitude rather than feeling entirely free to shun PE lenders who’d attempt to enforce restrictive terms on them.

            What I tried to indicate I was skeptical about is niether the sincerity of the FT’s report or its reporter or the resentment of the funds investors toward PE bullies but only that I doubt that regulators shall do much in law to really oppose such attempts to impose strict terms of confidentiality. Maybe I have misunderstood a key aspect in the relations as stated– I assume that asset managers refers to people on the PE side of the counter-parties, for example. Maybe that’s a mistake on my part. [ And as I read it, I understood “Private equity looks like a high end version of the mortgage servicing industry,” to mean that, by analogy, the pension fund clients are being treated as though they were in a similar position to that of a borrower seeking a mortgage arrangement back at the height of the sub-prime lending scandals. ]

            if I misconstrued the details then that’s of course my fault and I apologize but I did think I’d understood the main ideas. The U.S. has a relatively weak press in this regard and funds investors (i.e. pension fund clients) are being taken advantage of by PE lenders. Why either should necessarily be the case suggests, yes, too much power and cronyism between mass-media and esp. business-oriented press and financial market interests and the grad. education institutions that seek to serve and influence both. I understood that U.K. habits don’t or might not translate into relief for the disadvantaged investors in the U.S.–“Soit.” Still, given similar counter-party needs and interests in each of the two cases, what’s feasible in terms of defiance of intimidation for one–or, on the other hand, feasible in terms of client-intimidation for one, should, it seems to me, be feasible for the same counter-party in the other market arena. Just as, if there exists in the U.K., a press organ capable of publishing such a critical article as this from the FT, it is passing odd that in the whole of the U.S. there’s no press organ able and willing to do something similar.

            And, finally, as there is so much interbreeding between U.S. and U.K. business culture, what the FT lambasts in the U.K. it, by a certain sense, also lambasts in the U.S. in so far as the other circumstances are similarly founded.

            By the same token, if, when all is said and done, the U.S. financial market regulators can’t muster the gumption to sanction PE as I understand you to advocate here, then, really, I can see little good ground (to put it mildly) to expect that the U.K.’s financial regulators to behave with greater courage and gusto–the FT article notwithstanding. Still not sure what I’ve missed that is essential.

  3. rainbow sally

    This comment was probably supposed to be about monetary policy, especially in the UK, but since the Anglo-American banks seem to represent themselves in our governments, as do other large entities too big to jail (with a plethora of evidence suggesting that there is collusion between all), I’d like to broaden this to include the ethics of a unregulated, unbridled, capitalistic system, that runs itself like a boxing match without a referee.

    The data is in.;range=my
    You can see when it happened even if you can’t see how it happened.

    And again, this is supported by the plot of the drift in the philosophies of the political parties in the UK.

    The fact that in the US and the UK the secret national security apparatus is also constantly protecting and defending something contrary to the public good in both countries while (in many cases) causing the problems they purport to protect the public from (and in many cases either deliberately or utterly predictably), we can say for a certainty that the days of Adam Smith’s Wealth Of Nations are over.

    How ironic that the man (Smith) who said in plain English to government representatives to be suspicious of the “order of men” comprising the dealer and master classes because their interests are never the same as the public’s and his writings are “thumped” as gospel by the the ultra-capitalistic libertarians who obviously do not know what he said or what he meant.

    Those are two driving forces (unbridled hunger for wealth and national security authorities who are above the law) in a deteriorating status quo trend which, if it is ever corrected, is likely to take a great and sudden spiritual enlightenment, a unified global re-evaluation of common assumptions, and/or physical destruction of as much of the universe as possible so there’s no possible way to escape the obvious..

    My prediction, based on this pessimism, is that we will continue to follow blind men who walk backward to the brink or past the brink of utter global demolition. When people can say that “you can’t rush capitalism”, in the context of the folly of giving workers a survivable wage, and this concept is not immediate ridiculed due to the recognition of the fact that the common earthworm is incapable of understanding right and wrong.

    Nothing against earthworms. They are critical components of the biosystem. But hey… as spiritual, religious leaders, political guides, “deciders of war”, or representatives of the higher order organisms they simply cannot understand what they aren’t equipped to understand.

    No offense.

  4. MikeNY

    I suspect you are very right about the conflicts US biz schools have with PE kingpins … very well-known PE chieftains have sat on the boards of trustees of my schools — which of course, means that they were big donors. Don’t wanna bite the hand… This ties into the idea that good US colleges have become privilege perpetuation devices, and that the ‘meritocracy’ meme is a fiction even (especially?) there.

  5. Nate

    From 2008 to present, I’m not aware of anyone releasing any type of testimony or detailed interviews from pension fund managers or other investment advisors concerning their decisions to buy mortage-related CDO’s, CDS etc. I suppose it’s not an accident…

    1. Yves Smith Post author

      Pension funds in the US never did CDS or synthetic or heavily synthetic CDOs. I would pretty much bet they never KNOWINGLY bought CDOs directly, although they could have invested in structured credit hedge funds that did. There were some cases (one in Wisconsin) where a retirement fund (I think government) did buy some CDOs with leverage, but the salesman misrepresented the trade (as in basically lied about what the assets were) and major litigation ensued. Some funds in Colorado were similarly abused. There were some destinations like Australia where town councils and other rubes were treated as CDO stuffees.

  6. flora

    Keep up the good work on PE reporting, Yves. Cause and effect exists, although it isn’t always linear.

Comments are closed.